Month: December 2022

Amid years of scandals, mismanagement, mammoth asset outflows, and the current dilution from a vital capital raise that is under way, Credit Suisse shares have plunged for 13 straight days (the longest losing streak in the bank’s history) to a new record low, just a few percent above the price of 2.52 francs for the 4 billion Swiss Franc subscription rights that the bank offered existing investors.

The threshold of 2.52 francs is “the ‘hard underwriting’ price for the consortium of 19 banks,” JPMorgan & Co. analysts said in a research note.

If Credit Suisse’s shares keep trading above that level until “the last day of rights trading on Dec 6, 2022, we can assume at that point the capital raise was most likely a success.”

If not, then who knows what’s next?

As Bloomberg reports, while the rights offer is “highly unlikely” to fail, such a scenario would cause S&P to “evaluate” the impact on the credit ratings it has placed on Credit Suisse, analyst Anna Lozmann said by email. She also said that “continued strong outflows of deposits” could be a “trigger for a negative rating action.”

Credit Suisse’s overhaul, including job cuts and the carve-out of the investment banking business, has met with skepticism from analysts and investors concerned about the complexity of the restructuring.

And today, Bloomberg reports that, according to two people familiar with the bank’s plans, CS is cutting at least a third of its debt sales positions globally as part of a restructuring that will eliminate thousands of jobs and a new strategy that drastically downsizes its investment banking and trading business.

The Swiss lender is reducing headcount in its debt syndicate division, which prices bond deals, as it slims down its so-called flow business.

The Zurich-based bank plans to reduce costs by cutting 2,700 jobs this year and 9,000 jobs by the end of 2025.

The “material capital raise” and lack of details on a “very complex” investment banking restructuring is weighing on Credit Suisse’s shares, JPMorgan analyst Kian Abouhossein wrote in a note on Thursday.

He also cut earnings estimates by 45% for 2023, citing the hefty outflows in the bank’s wealth management business.

Talks about a possible takeover of Credit Suisse are likely to pick-up if outflows continue, he said.

Authored by Clarissa Hawes via FreightWaves.com,

Nearly 115,000 railroaders were closely following two votes Wednesday in the U.S. House of Representatives after President Joe Biden called on Congress to immediately pass legislation to avert a rail strike.

The House voted 290-137 Wednesday to avert a possible rail strike amid debate over the national tentative agreement brokered by the White House between union employees and Class I railroads in September. Nearly 40% of the nation’s freight is moved by rail.

Railroad workers for the 12 freight unions have been operating without a new contract for over three years.

However, strict attendance policies and the lack of paid sick days have been sticking points for the majority of rail workers, including the nearly 60,000 members of four freight rail unions that voted to reject the national contract in mid-November.

“It’s been a long three years, depending on how you look at it,” Jeremy Ferguson, president of the International Association of Sheet Metal, Air, Rail, and Transportation Workers (SMART-TD), told FreightWaves.

“The workforce is cut back to the bone, and those that are left are having to pick up the slack.” 

On Wednesday, SMART-TD issued a statement that it “does not support the notion of Congress intervening in our collective bargaining negotiations to prevent a strike.”

 “We firmly believe in the workers’ right to fight for their own best interests, as well as the best interests of their families,” according to the SMART-TD statement.

“Unfortunately, threats to the economy have caused this Congress to believe that a strike aversion is the best course for this nation.

Separately Wednesday, the House passed legislation by a vote of 221-207 to add seven days of paid sick leave to the tentative rail agreement. Both pieces of legislation aimed to stop a rail strike now head to the Senate.

None of the railroaders FreightWaves spoke to for this article want to go on strike but said they wanted the rail carriers and shippers “to put employees over record profits” and address some of the major challenges, including precision scheduled railroading (PSR), the attendance policy and lack of paid sick leave, that have resulted in a mass exodus among railroad employees.

Railroaders say morale, quality of life at all-time low

One locomotive engineer says morale is at an all-time low at the Class I railroad where he’s worked for more than 25 years. He’s seen engineers with 15 or 20 years “tie up for the last time” and quit.

He’s among nearly 24,000 locomotive engineers and trainmen who make up the Brotherhood of Locomotive Engineers and Trainmen (BLET). BLET was among eight freight unions that voted in mid-November to accept the national tentative agreement reached between the unions and railroads in September.

BLET, the second-largest rail union, voted 53.5% in favor of ratifying the national agreement, while 46.5% of its membership voted against it.

While the engineer, who didn’t want to be named in the article for fear of retaliation, wouldn’t say how he voted earlier this month, he understands why four of the 12 freight unions, including SMART-TD, the largest union, rejected the agreement. 

“I know some of the younger engineers voted for the agreement so they can receive their back pay because they plan to quit because they don’t have the seniority that I do,” he said.

“I don’t blame them — they want jobs where they are home more, can attend their kids’ events, and some are trying to save their marriages after being on call 24/7 for the past few years.”

He said there used to be several road engineers at any given time who were marked up as available to work once his shift ended. That’s not the case now, he said, as some have quit, were fired or took other jobs.

“Now, sometimes I get off the train after being gone on the road for a few days, drive an hour to my house, sleep for 10 hours, then I’m being woken up by a call from a crew dispatcher to report for work in two hours,” the engineer said.

“It’s not much of a life for road engineers and conductors anymore.”

He and his conductor both contracted COVID in 2020 at a time when all of the Class I railroads had slashed their workforces because of precision scheduled railroading (PSR) running longer trains with fewer employees. Around the same time, the rail carriers had made major cuts to middle management and ground employees, forcing him and others “to do more with less.”

Unable to work for three days because of COVID, he received a call from his dispatcher threatening disciplinary action if he did not return to work.

His railroad does offer short-term disability that pays him 65% of his hourly rate after seven days of unpaid leave, but he couldn’t afford to stay home. The engineer said he also faced immense pressure from his bosses to return before he was well. Prior to the COVID-19 vaccine being available, he said engineers and conductors continued to pass the potentially deadly virus back and forth and to other employees amid demand to keep up with the freight volume.

“I had friends that I worked with for 20 years who died of COVID, but we couldn’t even go to their funerals without facing scrutiny by management,” the engineer said. “We had no choice but to work.”

Jeremy Ferguson, president of SMART-TD, appeared on a recent episode of FWNOW to talk about next steps to avoid a possible rail strike. (Photo Credit: FWTV)

Ferguson said his membership wants changes to the railroad carriers’ emphasis on PSR and building massive trains.

“One of the biggest issues that we’ve had in the past year with precision scheduled railroading was trying to cut the workforce and then the attendance policies being ratcheted up to a level that we’ve never seen before. … Before, some people were allowed five to six days off a month [but] now are down to one day a month and no family time,” Ferguson said.

A Class I railroad conductor with more than 25 years of experience said he’s never worked at a job that spends so much money to train employees, only to spend double that amount to find something to fire them for once they are considered trained and marked up to work. 

“There’s this rush to get everybody trained but management isn’t focused on teaching or ‘on-the-job training’ once they mark up at our railroad,” the conductor told FreightWaves.

“In the early days when I was starting out, I had a mentor who had been with the railroad a long time that would pull me aside and explain to me what I did wrong. There’s a learning curve to working on the railroad. Sure, I would get ribbed by the old-timers for a while, but they helped me.”

The biggest lesson he learned was to buy job insurance from companies that specialize in the rail industry.

“I explain it to new hires that it’s like ballerinas who have insurance on their legs and/or feet because that’s how they make a living,” the conductor said.

“Buying job insurance is a product of the way they treat people on the railroad; we have to do this.”

A locomotive engineer for another railroad agreed.

“The railroad wants to fire you at every turn — that’s why almost every single one of us carries job insurance,” the engineer said.

“I don’t know that there’s too many other industries on the planet that carries insurance to protect our jobs.”

A member of the Brotherhood of Maintenance of Way Employes Division (BMWED), who also declined to have his name published for fear of being targeted, said he was among 56% of the rank and file who rejected the tentative national agreement in October.

The BMWED has nearly 26,000 workers who build and maintain the tracks and bridges on railroads across the nation.

He voted against the contract over the Class I railroads’ refusal to provide paid sick leave for railroad workers. He said he was told by railroad management that his union contract provided him with ample weeks of vacation time to go to the doctor if needed. The maintenance-of-way employee said that even though he ranks relatively high in seniority and is among the first to pick his weeks of vacation for the next year, there’s no way he could predict when he needs to go to the doctor or use a day to stay home with a sick child.

“My wife is my hero,” the employee said.

“She has a demanding job, too, but she never uses her sick days for herself; it’s always for the kids because I can’t do it without repercussions. It’s been a huge strain on our marriage.” 

He said most railroaders hope to avert a strike, which could result in economic losses of $2 billion per day. He said he and approximately 115,000 railroaders would be without paychecks right before Christmas.

“I’ve been called selfish and greedy because no paid sick time by the railroads is a deal-breaker for me, but the office employees at these railroads automatically get 80 hours of sick time,” the worker told FreightWaves.

“We worked through a pandemic and didn’t have the option of working from home or shelter in place like the office personnel,” he said.

“The railroad told us how proud they were and thanked us for being essential workers. When you offer some employees paid sick time and tell them to stay safe, but then management tells us to get back on the road because there are not enough workers, it sends a message that we aren’t important and we are only essential to their bottom lines.”

After several months of crushing losses, November was a very strong month for markets, with broad-based gains across equities, credit, sovereign bonds and commodities. In fact, 35 of the 38 noncurrency assets tracked by Deutsche Bank were in positive territory, which is the highest number so far this year and makes a change from the prevailing dismal market mood we’ve been used to.

As DB’s Henry Allen writes in his November performance review, the positive market momentum was propelled by a number of factors, including signs that inflation momentum was beginning to ease across the key economies, with downside surprises from both the US and the Euro Area in the latest data. In the meantime, there were further signs that China was inching away from its zero Covid strategy, leading to a massive outperformance from Chinese assets. However, one asset that struggled was the US Dollar, and the unwinding risk premium meant it experienced its worst month in over a decade.

In terms of the drivers behind the various market moves, the biggest one was the downside surprise in the US CPI reading for October, which came out on November 10. That came in below expectations, and the monthly growth in core CPI was the slowest in over a year. In turn, that triggered an incredible single-day rally, with yields on 2yr Treasuries seeing their biggest daily decline since 2008, whilst the S&P 500 had its best day since April 2020. Furthermore, the report led investors to price in a growing chance that the Fed would slow down the pace of their rate hikes to just 50bps in December, following four consecutive hikes at a 75bps pace. That was cemented on the final day of the month in a speech by Fed Chair Powell, who said that “the time for moderating the pace of rate increases may come as soon as the December meeting.” The positive inflation news wasn’t confined to the US either, since on the last day of the month we got the flash CPI release for the Euro Area, which fell by more than expected to +10.0%.

Against that backdrop, Allen notes that the rally in risk assets continued, and the S&P 500 is now up by more than +14% in total return terms over October and November! That’s the best performance for the index over two calendar months since late 2020, although there remain plenty of doubts about how durable this is and whether this is just another bear market rally. Meanwhile, the prospect of a downshift from the Fed saw Treasuries (+2.8%) put in their best monthly performance since March 2020, back when the pandemic started and the Fed cut rates back to the zero lower bound.

The second big positive driver for markets in November came from China, where there were growing signs that officials were inching away from the zero Covid strategy. For example, officials said they would seek to raise vaccination rates among the elderly, which was good news for markets since stronger levels of immunity are seen as raising the chances of the economy reopening. Earlier in the month, the quarantine requirement for close co tacts and inbound travellers was also cut from 10 days to 8. And on the final day of the month, Vice Premier Sun Chunlan said that “As the omicron variant becomes less pathogenic, more people get vaccinated and our experience in Covid prevention accumulates, our fight against the pandemic is at a new stage and it comes with new tasks”. All this meant Chinese assets performed very strongly, with the Shanghai Composite up +8.9%, and the Hang Seng up +26.8%. That marked the best month for the Hang Seng since October 1998.

In the UK, gilts (+2.9%) outperformed for a second month running as the turmoil stemming from the mini-budget in late September continued to unwind. Indeed, the spread of UK 10yr yields over bunds came down by a further -13.8bps over the month to 123bps. Markets reacted calmly to the government’s Autumn Statement as well, which included £55bn of fiscal tightening as the government sought to reassure investors about their fiscal credibility.

Still, despite the cross-asset rally in November, the DB strategist correctly notes that there’s plenty of pessimism in markets at this moment. For instance, the 2s10s curve that’s inverted prior to all of the last 10 US recessions is now inverted by -71bps, which is the lowest monthly close since September 1981. In addition, the Fed’s preferred curve of the near-term forward spread (measured by the 18m forward 3m yield minus the spot 3m yield) inverted in November for the first time in this cycle so far, and ended the month at -41bps.

There were also plenty of jitters around crypto-assets over the month, particularly following the bankruptcy of crypto exchange FTX, followed by BlockFi later in the month. That backdrop saw Bitcoin fall -16.2% in November to $17,105, which is its lowest monthly close since October 2020.

Which assets saw the biggest gains in November?

• Equities: The equity rebound from October continued into November, with the S&P 500 (+5.6%), the STOXX 600 (+6.9%) posting solid gains in total return terms. The Hang Seng strongly outperformed, and its +26.8% gain over the month was the largest since October 1998. That said, the major indices are still in negative territory on a YTD basis, with the S&P 500 down -13.1%.
• Sovereign Bonds: Fresh hopes that we might have seen the worst of inflation supported sovereign bonds this month, with Treasuries (+2.8%) seeing their best performance since March 2020. Gilts (+2.9%) outperformed in November as they continued to recover from the turmoil following the mini-budget, but they remain one of the worst YTD performers, having lost -21.6% since the start of the year.
• Credit: All of the credit indices in our sample moved higher this month across USD, EUR and GBP. That’s only the second month this year that’s happened, with July being the other time. US HY was a relative underperformer however, with just a +2.2% gain.
• Metals: Both copper (+10.5%) and gold (+8.3%) ended a run of 7 consecutive monthly declines in November. Copper was supported by hopes that China might move away from the zero Covid strategy, helping to boost demand.

Which assets saw the biggest losses in November?

• Oil: Brent crude (-9.9%) fell for the 5th time in the last 6 months, ending November at just $85.43/bbl. Even so, it’s still in positive YTD territory, having advanced +9.8% since the start of the year.
• US Dollar: Stronger risk appetite meant that the risk premium supporting the dollar unwound somewhat, with the dollar index down -5.0% over the month. That’s its worst performance since July 2020, with the dollar weakening against every other G10 currency.
• Cryptocurrencies: The FTX bankruptcy meant there was a tough backdrop for crypto-assets, and Bitcoin fell -16.2% in November, bringing its YTD decline to -63.1%. Other cryptocurrencies struggled too, with Ethereum down -17.1%.

Finally, here is a visual breakdown of the top assets in November…

… and YTD.

More in the full report available to pro subs.

Authored by Steve Watson via Summit News,

Republicans in the Senate have threatened to block the National Defense Authorization Act unless a vote is held on the current COVID vaccine mandate for military personnel.

The effort is being headed up by Florida Senator Rick Scott and Kentucky Senator Rand Paul, along with 11 other senators, including Ted Cruz and Mike Lee.

As a veteran & member of @SASCGOP, I fully support our military & have fought hard for big nat’l security wins in the NDAA. But, before this bill moves forward, we must stand with our military members & reverse the @DeptofDefense‘s COVID vax mandate. U.S. readiness depends on it. pic.twitter.com/DoRgn5cJZh

— Rick Scott (@SenRickScott) November 30, 2022

Scott told Fox News “I think on the NDAA one thing that’s going to be important is that we don’t give cloture unless they agree that we’re not going to keep kicking people out of the service for their – if they’re unvaccinated,” adding “I think that we’ve got to start standing up for people.”

In a letter to Senate Minority Leader Mitch McConnell, the Senators state “The Department of Defense COVID-19 vaccine mandate has ruined the livelihoods of men and women who have honorably served our country.”

“While the Department of Defense certainly must make decisions that will bolster military readiness, the effects of the mandate are antithetical to readiness of our force, and the policy must be revoked,” the letter further states.

I’m opposing moving forward on the NDAA unless the Senate votes on an amendment to prohibit discharges from the Armed Forces solely because of vaccination status. The amendment will also reinstate service members already discharged w/ back pay. Read more: https://t.co/ejcYF64Koa pic.twitter.com/4qa3Gu74r4

— Senator Rand Paul (@SenRandPaul) November 30, 2022

During a press conference, Paul stated “The vaccination mandate has forced our nation’s young patriotic men and women to choose between their faith, their medical autonomy and their careers.”

“At a time when the military is struggling to meet targets for recruitment, the administration is firing soldiers we invested in and trained,” Paul further noted.

For five decades now, the NDAA has been viewed as vital legislation for Congress each year, covering spending for the military, including the annual pay raise and new program starts.

Despite attempts to stop mandatory vaccines for active duty personnel, and to uphold exemption rights, the Biden administration has continually pushed for dishonourable discharges and even court martialing for troops who disobey orders to get the shots.

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A day after Spanish authorities scrambled to evacuate and seal off the Ukrainian embassy in Madrid over a letter bomb from an unknown sender which injured a Ukrainian employee, the US Embassy in the capital city has also confirmed it received a “similar” package.

“The United States’ embassy in Madrid has received a letter similar to the five letter-bombs sent to the Ukrainian embassy to Spain and other targets in the country, according to La Sexta TV station,” Al Jazeera reports Thursday. At sixth letter bomb was reported later in the day. An official US Embassy statement said, “We can confirm a suspicious package was received at the U.S. Embassy in Madrid.”

Spain’s Deputy Interior Minister Rafael Perez briefed reporters, saying that while a culprit has yet to be identified, all the letter bombs are believed to have been sent from within the country. Letter bombs were also mailed to three government offices as well as Spanish arms maker, he told reporters.

Spain has said it is greatly increasing security measures at government offices and outside of embassies and foreign consulates around the country amid the ongoing threat. The prime minister’s office had been sent a letter bomb last week, which was intercepted.

According to details in CNN of the sixth uncovered letter bomb: 

The sixth and latest bomb was detected Thursday afternoon and sent to the US embassy in Madrid. It was intercepted at around 12.30 p.m. local time at the security post of the embassy, a police source told CNN. A special protocol was activated for these cases, the source added.

“We are grateful to Spanish law enforcement for their assistance with this matter,” Jamie Martin, a spokeswoman for the US Embassy in Madrid, told CNN.

With security already on a heightened state of alert over suspicious packages, the letter bomb did not denotate, with the one sent to a Spanish weapon manufacturer described as having been defused by a bomb squad.

Letter bombs of mysterious origin sent to six targets in Spain, including PM’s office and US embassy.

“We can confirm a suspicious package was received at the U.S. Embassy in Madrid,” @USembassyMadrid says. https://t.co/n4EXuOuDOK

— Chico Harlan (@chicoharlan) December 1, 2022

There have been no further reported explosions or injuries following the initial Ukrainian embassy blast on Wednesday. According to further details on the package addressed to the US Embassy: 

The bomb “would be similar, for its features and content” to those received on Wednesday at the Ukrainian embassy in Madrid and at the arms manufacturer Instalaza in Zaragoza, and on Thursday at Spain’s Torrejon air force base near Madrid, the statement said.

The most recent letter bomb was intercepted just before dawn Thursday after being sent to the Torrejon air force base.

Spain’s defense ministry is reportedly utilizing specialized scanners in an attempt to identify potential threats coming in the mail particularly at sensitive government facilities and military bases.

By Simon White, Bloomberg markets reporter and analyst

Equities owned by upper-middle-income households in the US are at increasing risk of liquidation as this group feels the cost-of-living crisis ever more acutely.

The pandemic saw many new precedents set. Never before had we seen economies switched off at the mains, nor such government largesse to deal with the fallout

But the aftereffects are not being spread equally. It is those in the upper-middle income groups (annual household income of about $70,000-$200,000) who:

• are seeing the greatest relative rise in debt repayments

• who are experiencing losses on portfolios and pensions as financial assets fall in price

• have sizable mortgages compared to their net worth

• are seeing the slowest wage growth

• yet who often fail to qualify for much in the way of government support

This has earned them the sobriquet of the “squeezed middle,” and they have plenty of equities available to sell.

The main economic impact of the pandemic was an historic rise in savings driven by fiscal stimulus and a collapse in consumption. But after the feast, the famine, and savings are falling across all income groups. The Fed estimates that “excess savings,” the cumulative sum of savings relative to trend from the beginning of 2020, has fallen 26% in a year to $1.7 trillion.

Yet it is by drilling down we see that the economic stress is not being spread evenly, and it is those in the middle-to-upper income groups that are experiencing the most hardship relative to their recent history.

These groups are seeing excess savings built up through the pandemic eroded most quickly. Savings is disposable income net of consumption and non-mortgage interest payments. Disposable income is falling and the fall is most marked in higher income groups.

Higher-income groups are also spending less, but this is explained by the greater proportion of richer households’ expenditure being services-based, and many services that were foregone in the pandemic do not need to be replaced (you don’t need an extra haircut or yoga class for the one you missed).

Despite this, middle-income households are seeing the most stress on their savings. Bank deposits rose sharply through the pandemic, as government stimulus was (mainly) paid into household checking accounts. But recently, bank deposits have been falling.

This has been driven by a fall in savings deposits, mainly of middle-income households. Furthermore, the fall in savings deposits is greater than the rise in checking deposits, so this is more than a straight transfer of money from savings to checking accounts.

But the surest sign the middle-income groups are starting to feel the pinch is the rise in loans, with the 50%-90% income group seeing the largest rise.

Lower income groups are feeling the squeeze too, but less so relative to their own recent history. They saw a much larger rise in their income compared to their pre-pandemic trend, driven by fiscal support and, latterly, faster wage growth.

Higher-income groups are experiencing more relative economic difficulty and this is manifesting itself in savings being drawn down and more loans being taken out. But credit is tightening and loan growth is starting to slow.

One lever left to them is their investments, and therein lies risk to the equity market. The US household sector is very overweight equities versus bonds, and that is heavily concentrated in the upper-income groups: those in the 50th-to-100th income percentiles own 99.2% of the household sector’s equities; while those in the 50th-to-99th percentiles own 46%, or $15.2 trillion’s worth. That’s a lot of potential selling power.

Some liquidation may have already started. Investors’ cash allocations have risen sharply, but are still nowhere near the GFC, when equity holdings of the 50th-to-99th percentile fell almost 20% in excess of the market’s fall, implying significant selling.

Household allocation to equities in this cycle is beginning to turn lower from all-time highs. This tends to lead long-term equity returns — higher allocations typically lead to larger reductions in equity exposure, dragging down returns. 

A recession is one threat equities face — a potentially even greater one is a squeezed household sector forced to sell its holdings.

The 5th US Circuit Court of Appeals has denied a Biden administration request to temporarily reverse a lower-court order that blocked the rollout of Biden’s student loan forgiveness plan.

The plan would forgive up to $20,000 in federal student loans for eligible borrowers who make under $125,000 per year, or $250,000 for households.

In a brief order, a three-judge panel of the New Orleans-based appeals court rejected the request – meaning the plan will remain on hold while the administration appeals a decision from a Texas judge which deemed the scheme (which undoubtedly garnered a few midterm votes for Democrats) illegal.

The next stop for the Biden administration will be to seek a reversal of the 5th Circuit’s decision through the US Supreme Court, according to a court filing from the administration in a separate legal challenge, Bloomberg reports.

Court orders across multiple lawsuits have blocked the distribution of any debt relief under the plan since late October. The government has ceased collecting applications for relief while the legal battles over the proposal proceed.

Wednesday’s order comes in a case brought by the Job Creators Network Foundation, a conservative advocacy group, on behalf of two Texas borrowers who claim that their education debt was unfairly excluded from the program. -Bloomberg

Meanwhile, another lawsuit led by six GOP states is asking the US Supreme Court to keep the plan on hold while their legal challenge works its way through the system. The state officials say Biden exceeded his executive authority by failing to obtain congressional approval, adding that it will negatively impact local loan servicers.

Roughly 26 million people requested debt relief before the Department of Education stopped accepting applications.